Haynesville Shale Production - 2013 Will Be The Year It Finally Starts Dropping

It has been a frustrating few years for investors who are long natural gas either directly or through producers.

I believe we may be close to finally getting some support for prices as production from the Haynesville shale starts to roll over.

And I for one say that it is about time!

One thing that we know about shale gas and shale oil production is that the wells come on very strong and then the rate of production declines very quickly.

After one year, the level of production drops by 65% to 80%. After two years, it drops another 35%. If producers stop drilling wells, the level of production is going to drop very quickly.

In the Haynesville Shale in 2012, the industry has pretty much stopped drilling:

(click to enlarge)

From a peak of 180 in 2010, the number of wells active in the Haynesville hasn't dropped, it has plummeted. As of the most recent update, the Haynesville rig count stands at just over 20, as producers such as Chesapeake Energy (NYSE:CHK) have finally stopped drilling.

Despite this rig count decline, production has been stubbornly flat:

(click to enlarge)

I believe that we are on the verge of Haynesville production rolling over and this drop in rigs showing up. The CEO of Ultra Petroleum (NYSE:UPL) agrees and estimates that Haynesville production could drop 10% per quarter at the current rig count level.

That would mean a 2.5 billion cubic feet per day reduction over the course of a year for the Haynesville Shale, which would make a significant difference to the supply and demand relationship for the entire country.

I admit to being surprised that the Haynesville production hasn't started declining prior to now. I believe the reason it hasn't is that there is a delay between when a well is drilled and when it is actually placed on production.

Therefore, the Haynesville production we have seen so far in 2012 is more indicative of the number of drilling rigs that were working in 2011, which in 2011 averaged 130 (started at 160 and ended at 100). In 2013 and in the final months of 2012 we are going to see the impact of the number of drilling rigs active in 2012 which has seen a decrease from 100 to 20.

So while I'm not about to pound the table about now being the time to get exposed to natural gas (NYSEARCA:UNG) investments, I am willing to suggest that things are about to get a little bit better.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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